Around this time last year, Talisman Energy (NYSE:TLM) unveiled a serious strategic overhaul. Now that we're a year into the transformation, it's a perfect time to take a look at how the firm's performing. In order to make sense of the changes afoot, however, a word is required about the prior status quo.

Fast, cheap, and out of control
Talisman, one of Canada's larger independent oil & gas producers, operated under the BP (NYSE:BP) umbrella prior to a spinoff in 1992. That corporate connection resurfaced when a BP veteran, John Manzoni, took the helm in 2007. What Manzoni found at that time was a company that had grown large, and somewhat unfocused, by pursuing an "acquire and exploit"-type business model that spanned the globe. The company had such far-flung operations that my colleague David Lee Smith last year dubbed it Talisman the Traveling Man.

That overstretch makes Talisman more reminiscent of Devon Energy (NYSE:DVN) -- whose portfolio adjustments continue to the present day -- than of XTO Energy (NYSE:XTO), which has stuck close to home.

Beyond the lack of operational focus, Manzoni perceived that Talisman had reached such a size that it was running faster and faster just to stand still. That Alice in Wonderland-style analogy is an apt one for capitalism in general, but it's particularly applicable to oil and  gas, a business in which you're dealing with often rapidly depleting assets.

Meanwhile, other independents had hit upon a new model -- that of exploiting unconventional resource plays in a scalable and predictable manner. Chesapeake Energy (NYSE:CHK), EnCana (NYSE:ECA), and Range Resources (NYSE:RRC) are just three of the E&Ps following this new strategy, the success of which has been stunning. XTO recently spoke about the difficulty it now faces in restraining growth in places like the Barnett shale. That's a "problem" the industry's not really used to.

Talisman found itself with a foothold in at least two very promising North American resource plays, which would form a key part of the firm's new strategy: focus on longer-term growth in its three core areas (North America unconventional, Southeast Asia, North Sea), exit non-strategic areas, and focus international exploration on larger opportunities, with an eye to establishing new core areas.

The new Talisman
Fast forward one year, and Talisman appears to be hitting its transformation targets.

In North America, the firm has focused on establishing what sort of captured resource base it possesses in key plays like the Marcellus in Appalachia and the Montney in Canada. With 132 trillion cubic feet of original gas in place, Talisman estimates that 30 trillion can be developed over time. The company also believes that, for at least those two plays, it can generate economic returns in a $4 natural gas environment.

In Southeast Asia, Talisman has significant operations in Malaysia, Indonesia, and Vietnam. This is a valuable growth platform for several reasons. Finding and development costs have typically averaged about 30% below global averages, and operating costs are attractive as well. Another positive feature is the structuring of local production sharing agreements, in which over 70% of gas under contract is linked to an oil price index. With oil and gas prices diverging lately, that ought to help Talisman maintain very healthy cash flow margins in the region.

The third core growth area is the North Sea, with the UK section providing strong free cash flow and oil leverage, while Norway offers meaningful exploration upside. Talisman demonstrated this potential just last week, with its 40%-operated Grevling oil discovery.

Focus, people
As for whittling the portfolio down, Talisman has already exceeded its target of C$1.5 to C$2 billion in divestitures by year-end 2009. Between southeast Saskatchewan, the Netherlands, Trinidad and Tobago, and a few other non-core sales, Talisman has completed or announced C$2.5 billion (US$2.3 billion) in asset disposals.

The company has also focused its exploration program on five regions with the most material upside:

  • Colombia
  • Peru
  • Kurdistan region (Northern Iraq)
  • Vietnam
  • Indonesia

Over the next five years, Talisman aims to discover 600 million barrels of resources at a sub-C$5 per-barrel finding cost. With a revision in the exploration budget from $750 million to $600 million annually, the bar has been lowered a bit, but it's still a robust program. With fresh blood in the exploration team and fewer distractions globally, I think the firm has a fair shot at hitting or exceeding these goals.

Now that you're up to speed on where the company's been, and where it intends to go, you can monitor Talisman's progress along with me, and judge for yourself whether the E&P deserves a spot in your portfolio. Motley Fool CAPS players are certainly gung-ho, rating the stock a full five stars. See what excites them about this international explorer, or share your own views, right here.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.